New Law Effective October 1, 2009
Effective October 1, 2009, Michigan has a new securities law: the Michigan Uniform Securities Act (MUSA). The old securities law, enacted in 1964, is being replaced by an entirely new law. While much of the substance of the old law is contained in the new law, many changes have been made. Click here for an article that my partner, Shane Hansen, co-authored for the Michigan Bar Journal that highlights some of the important changes. The new Uniform Securities Act is available on the Michigan Legislature's web site at: http:/www.legislature.mi.gov/(S(535zpviz1dnticiqu5cb5j45))/mileg.aspx?page=getObject&objectName=mcl-Act-551-of-2008.
The Michigan Office of Financial and Insurance Regulation (OFIR) will be promulgating new rules to implement various provisions of the new law, though the rulemaking process is not anticipated to be completed until mid 2010.
The Old Nonprofit Exemption
Section 402(a)(8) of the old law, effective through September 30, 2009, provided that nonprofit securities offerings of $250,000 or less were entitled to an automatic exemption from registration if the securities were sold to bona fide members of the issuer without payment of commissions or consulting fees to any person except a registered broker-dealer. For nonprofit securities offerings in excess of $250,000 or in which commissions or consulting fees were paid, the nonprofit exemption under the old law was not automatic. To qualify for the exemption, the issuer was required to file a notice and pay a $50 fee. If OFIR did not disallow the exemption within 10 days, the exemption was effective. As a matter of practice, however, OFIR generally required each nonprofit filer to waive the 10 day period and then reviewed the offering essentially as a registration filing. OFIR would issue a non-disallowance letter (the functional equivalent of a registration order) only if the issuer had satisfied all comments. Upon issuance of the non-disallowance letter, the exemption under the old Act was valid for 12 months.
Section 703(3) of the new law provides a transition provision for securities offerings commenced pursuant to exemptions available under the old law. Section 703(3) provides:
The predecessor act exclusively governs any offer or sale made within 1 year after the effective date of this act pursuant to an offering made in good faith before the effective date of this act on the basis of an exemption available under the predecessor act.
Accordingly, if a nonprofit organization commenced an offering in Michigan before October 1, 2009, that qualified for the automatic exemption under Section 402(a)(8) of the old law, the organization may continue its securities offering in reliance on Section 402(a)(8) until September 30, 2010. Similarly, if an organization commenced an offering in Michigan pursuant to a non-disallowance letter issued by OFIR under Section 402(a)(8) of the old law, the organization may continue its securities offering in Michigan in reliance on Section 402(a)(8) for the 12-month period permitted by the non-disallowance letter. Thereafter, each nonprofit organization must comply with the exemption or registration requirements of the new law.
The New Nonprofit Exemption
As of October 1, 2009, nonprofit organizations will no longer follow the decades-old practice of making securities exemption filings in Michigan. Section 201(g) of MUSA now provides all nonprofit organizations with an automatic exemption from the requirements of Sections 301 to 306 and 505 of MUSA. No filings or fees are required under the new nonprofit exemption. The exemption is available for:
A security issued by a person organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, social, athletic, or reformatory purposes, or as a chamber of commerce, and not for pecuniary profit, no part of the net earnings of which inures to the benefit of a private stockholder or other person, or a security of a company that is excluded from the definition of an investment company under section 3(c)(10)(B) of the investment company act of 1940, 15 USC 80a-3.
Anticipated Changes in Exemption Requirements for Nonprofit Debt Securities
Significantly, however, MUSA Section 201(g) authorizes OFIR to limit the nonprofit exemption as applicable to nonprofit issuers of debt securities. Section 201(g) provides:
With respect to the offer or sale of a note, bond, debenture, or other evidence of indebtedness by a person described in this subdivision, the administrator by rule or order may limit the availability of this exemption by classifying securities, persons, and transactions, imposing different requirements for different classes, specifying with respect to subparagraph (ii) the scope of the exemption and the grounds for denial or suspension, and requiring an issuer to meet 1 or more of the following:
(i) To file a notice specifying the material terms of the proposed offer or sale and copies of any proposed sales and advertising literature to be used and provide that the exemption becomes effective if the administrator does not disallow the exemption within the period established by the rule.
(ii) To file a request for exemption authorization for which a rule under this act may specify the scope of the exemption; the requirement of an offering statement; the filing of sales and advertising literature; the filing of consent to service of process complying with section 611; and grounds for denial or suspension of the exemption.
(iii) To register under section 304.
It is our understanding that OFIR intends to follow option (iii), which will require all nonprofit debt securities to be registered by qualification under Section 304 of MUSA. OFIR may impose these requirements either by rule or by order.
So far, OFIR has issued two Transition Orders. Transition Order 09-049-M is contained in Bulletin 2009-14-SEC dated September 1, 2009. Transition Order 09-055-M was issued on September 30, 2009, and modifies paragraph 14 of the first transition order. Both orders are available on OFIR’s Web site at: http://www.michigan.gov/dleg/0,1607,7-154-10555_12900---,00.html. Neither of the Transition Orders relates to the nonprofit exemption under Section 201(g). Accordingly, as of today, OFIR has not imposed any limitations or conditions to the automatic exemption for securities of nonprofit organizations under Section 201(g).
Nonprofit organizations that offer or sell securities in Michigan after October 1, 2009 may now rely upon the automatic exemption available under Section 201(g) of MUSA. Unlike the old law, no filing or fee is required under this exemption.
It is likely, however, that OFIR will exercise its statutory authority to impose limitations on this new exemption. OFIR has indicated that it likely will follow option (iii) under the statute, which will effectively eliminate the exemption altogether and require registration by qualification for all nonprofit debt securities. OFIR may impose these requirements either by rule or by order to be issued in the future.
Accordingly, nonprofit organizations that have historically made annual securities filings in Michigan in reliance on the nonprofit exemption under Section 402(a)(8) of the old law may wish to consider pursuing a registration by qualification under Section 304 of the new law at the time of their next annual filing. While not required, this would avoid potential delays and disruptions caused by a "gap" in the annual state review of the securities filings.
We would be pleased to talk with you about these developments, and to assist you in all aspects of your firm's on-going legal and compliance needs. Warner Norcross & Judd LLP is a full-service law firm. Our Nonprofit Organizations Group is an interdisciplinary team of attorneys and paralegals who regularly advise and assist nonprofit organizations with the full range of legal and compliance matters. More information about our firm, our practice group and our services is available on our Web site at: /.
Please do not hesitate to call if you have any questions.
Tim Horner, Nonprofit Securities and Investment Management, 616.752.2180, firstname.lastname@example.org
Jaron Nyhof, Nonprofit Organization Securities and Investment Mangement, 616.396.3023, email@example.com
Jeff Power, Nonprofits Formation, Governance and Management, 616.752.2156, firstname.lastname@example.org
How to Join Distribution Group: If other members of your organization would like to be included in future notices and communication from the WNJ Nonprofit Organizations Group, please let us know by reply e-mail and we will be happy to add them.